domestic emissions reductions and offsets, proportionally. In this case, theWaxman–Markey
cap-and-trade program is projected to achieve permanent domestic emissions reductions
equal to just 6 percent below 2005 levels. Under the CAA, even if regulation includes some
form of trading, it may not include banking provisions, for either policy or legal reasons.
It is largely a matter of perspective which benchmark one chooses to represent emissions
reductions underWaxman–Markey: 33 percent including offsets, the presidents stated target
of 17 percent, or domestic emissions reductions of 10 percent (6 percent if adjusted for the
bank). However, these different benchmarks are important to keep in mind when evaluating
the strictly domestic emissions reductions that might be achieved under the CAA.
In summary, for the next decade or so it appears a regulatory approach could achieve emissions
reductions through mitigation in the domestic economy of up to 10 percent, relative to
2005 levels. These reductions would be comparable to domestic reductions that would have been
achieved under the legislative cap-and-trade proposal. Some cost-effective mitigation measures
would bemissed, but other measures that might not be captured through cap and trade could be
captured by regulation. In general, one cannot expect a regulatory agency to identify the same
emissions reductions as would incentive-based regulation because the agency does not have the
same information as do private decisionmakers, but initial and relatively low-cost opportunities
for emissions reductions are likely to be the target of new regulations.
Economic Performance of the CAA Relative to Cap-and-Trade Legislation
In addition to the raw emissions reduction numbers under alternative policies, it is important
to examine their broader efficiency and economic performance. Economists advocate an incentive-
based approach to environmental regulation in part because it can ‘‘get the prices
right’’ by internalizing the full social costs of economic activity into product prices. In this
way, the incentive-based approach promises not only to identify cost-effective mitigation
actions but also to promote efficiency in the allocation of resources throughout the economy.
If price signals internalize full social costs, then consumers have information that will help
them make investment decisions in—for example—new cars and air-conditioners that balance
energy efficiency with other product characteristics